United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[x] Quarterly Report pursuant Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from______to______
Commission File Number 0-21766
PLIANT SYSTEMS, INC.
Delaware 56-1615990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4024 Stirrup Creek Drive, Suite 700, Durham, N.C. 27703
(Address of principal executive offices) (Zip Code)
(919) 544-0015
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No_______
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Classes: Outstanding as of August 7, 2000:
Common Stock ($.01 par Value) 13,670,737
<PAGE>
PLIANT SYSTEMS, INC.
Index
<TABLE>
<CAPTION>
Page No.
-------------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets
June 30, 2000 and December 31, 1999 3-4
Condensed Statements of Operations
Three Months Ended June 30, 2000 and 1999 5
Condensed Statements of Operations
Six Months Ended June 30, 2000 and 1999 6
Condensed Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 7
Notes to Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18-19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19-20
Item 5. Other Information 20-29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
</TABLE>
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Balance Sheets
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash, cash equivalents $ 19,665,486 $ 41,481,289
Restricted cash (Note 2) -- 1,050,000
Short-term investments (Note 3) 30,490,992 21,655,887
Accounts receivable, trade, less allowances $50,000 in 2000
and $148,000 in 1999 725,387 8,284,549
Inventories (Note 4) 1,715,424 1,578,157
Prepaid expenses and other current assets 889,594 798,035
----------------------------------------------
Total current assets 53,486,883 74,847,917
Long term investments (Note 3) -- 5,296,678
Furniture, fixtures, and equipment:
Equipment 18,596,552 16,240,184
Software 5,830,521 5,554,299
Furniture and fixtures 727,963 728,341
Leasehold improvements 1,377,899 1,377,899
----------------------------------------------
26,532,935 23,900,723
Accumulated depreciation and amortization (19,383,980) (17,891,388)
----------------------------------------------
Net furniture, fixtures and equipment 7,148,955 6,009,335
Deferred debt issuance costs (net of accumulated amortization) 656,537 1,030,287
Other noncurrent assets (Note 5) 2,544,181 2,427,580
----------------------------------------------
Total assets $ 63,836,556 $ 89,611,797
==============================================
</TABLE>
See notes to Condensed Financial Statements.
3
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- -----------
<S> <C> <C>
(Unaudited) (Audited)
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 3,901,664 $ 7,738,270
Accrued expenses 5,568,057 5,570,599
Convertible debt (Note 6) 115,000,000 --
Deferred revenue 508,153 6,442,623
Accrued warranty reserve 363,635 830,852
----------------------- ----------------------
Total current liabilities 125,341,509 20,582,344
Long-term liabilities:
Convertible debt (Note 6) -- 115,000,000
Accrued expenses 490,000 --
Stockholders' deficit:
Series A preferred stock, $.01 par value; 100,000 shares
authorized; no shares issued and outstanding -- --
Convertible preferred stock, $.01 par value; 7,500,000
shares authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 13,664,099 and 13,605,073 shares
outstanding 136,641 136,051
Additional paid-in capital (Note 2) 156,795,642 156,573,170
Deferred compensation (Note 5) (350,000) (450,000)
Accumulated deficit (218,577,236) (202,229,768)
----------------------- ----------------------
Total stockholders' deficit (61,994,953) (45,970,547)
----------------------- ----------------------
Total liabilities and stockholders' deficit $ 63,836,556 $ 89,611,797
======================= ======================
</TABLE>
See notes to Condensed Financial Statements.
4
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
----------- ---------
<S> <C> <C>
Revenues:
Product sales and contract revenue $ 1,288,294 $ 3,859,250
Services revenue 2,648,778 1,865,872
Nonrefundable prepayment revenue -- 2,185,000
------------------------ ---------------------
Net revenues 3,937,072 7,910,122
Costs and expenses:
Cost of sales 1,706,705 3,661,738
Research and development 7,497,001 4,587,677
Selling, general and administrative expenses 3,605,110 3,114,668
------------------------ ---------------------
Total costs and expenses 12,808,816 11,364,083
Loss from operations (8,871,744) (3,453,961)
Other income (expense):
Interest income 850,471 805,985
Interest expense (1,623,800) (1,623,907)
------------------------ ---------------------
Total other income (expense) (773,329) (817,922)
------------------------ ---------------------
Net loss $ (9,645,073) $ (4,271,883)
======================== =====================
Net loss per share (Note 7) $ (.71) $ (.32)
======================== =====================
Average number of shares and equivalents 13,642,465 13,454,971
======================== =====================
</TABLE>
See notes to Condensed Financial Statements.
5
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
--------- --------
<S> <C> <C>
Revenues:
Product sales and contract revenue $ 2,846,173 $ 6,088,314
Services revenue 7,684,470 3,820,633
Nonrefundable prepayment revenue -- 2,185,000
------------------------ ---------------------
Net revenues 10,530,643 12,093,947
Costs and expenses:
Cost of sales 4,698,090 5,648,256
Research and development 13,691,491 9,027,192
Selling, general and administrative expenses 7,131,796 6,001,264
------------------------ ---------------------
Total costs and expenses 25,521,377 20,676,712
Loss from operations (14,990,734) (8,582,765)
Other income (expense):
Interest income 1,890,865 2,165,342
Interest expense (3,247,600) (3,247,707)
------------------------ ---------------------
Total other income (expense) (1,356,735) (1,082,365)
------------------------ ---------------------
Net loss $ (16,347,469) $ (9,665,130)
======================== =====================
Net loss per share (Note 7) $ (1.20) $ (.72)
======================== =====================
Average number of shares and equivalents 13,621,463 13,445,007
======================== =====================
</TABLE>
See notes to Condensed Financial Statements.
6
<PAGE>
PLIANT SYSTEMS, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------- -------
<S> <C> <C>
Operating activities
Net loss $ (16,347,469) $ (9,665,130)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,511,563 1,323,842
Other noncash charges 873,896 889,628
Changes in operating assets 7,288,735 (7,507,199)
Changes in operating liabilities (9,750,835) (3,986,554)
------------------------------------------
Net cash used in operating activities (16,424,110) (18,945,413)
Investing activities
Acquisitions of furniture, fixtures, and equipment (2,651,183) (1,517,795)
Acquisitions of product software (475,000) --
Net increase in investments (3,538,427) (13,759,417)
------------------------------------------
Net cash used in investing activities (6,664,610) (15,277,212)
Financing activities
Issuance of common stock 222,917 63,815
Settlement of put option (Note 2) -- (7,346,370)
Decrease in restricted cash (Note 2) 1,050,000 6,229,843
------------------------------------------
Net cash provided by (used in) financing activities 1,272,917 (1,052,712)
Decrease in cash and cash equivalents (21,815,803) (35,275,337)
Cash and cash equivalents at beginning of period 41,481,289 45,403,692
------------------------------------------
Cash and cash equivalents at end of period $ 19,665,486 $ 10,128,355
==========================================
</TABLE>
See notes to Condensed Financial Statements.
7
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
June 30, 2000
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited Condensed Financial Statements in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. We believe that all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and six-month periods ended June 30, 2000 and
1999 are not necessarily indicative of the results that may be expected for a
full fiscal year. For further information, refer to the financial statements and
accompanying footnotes for the year ended December 31, 1999 included in our Form
10-K submission.
2. RESTRICTED CASH
On December 31, 1999, we had an outstanding stand-by letter of credit in the
amount of $1.0 million, which was secured by restricted cash of the same amount.
The letter of credit expired in March 2000, and the related cash was
reclassified to unrestricted cash. On December 31, 1999, we also had $50,000
restricted cash on deposit with our primary bank as collateral for a corporate
procurement card. The collateral requirement for the bank procurement card was
removed in April 2000. As of June 30, 2000, we had no restricted cash.
In connection with a stock repurchase program authorized by the Board of
Directors, in 1997 we entered into an agreement with an investment banker. Up to
1.0 million shares of our common stock could be purchased through the use of put
and/or call option agreements. Based on the decline in the market value of our
common stock below the put option price of $9.11, we were required to reflect
the difference as restricted cash. The put option was exercised in March and
April 1999, and we paid the option holder $3.0 million in March 1999 and $4.3
million in April 1999. All payments were recorded as a reduction of paid-in
capital and a reduction in restricted cash. We have no further obligations under
the agreement.
3. CASH, CASH EQUIVALENTS AND INVESTMENTS
We consider all highly liquid investments, with a maturity of three months or
less when purchased, to be cash equivalents. Cash equivalents consist
principally of funds in demand deposit accounts, United States Treasury
obligations and commercial paper.
INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of our investments in debt
securities at the time of purchase. Debt securities for which we have both the
intent and ability to hold to maturity are classified as held to maturity. These
securities are carried at amortized cost. As of June 30, 2000, we had no
investments that qualified as trading or available for sale.
As of June 30, 2000 and December 31, 1999, our investments in debt securities
were classified as cash, cash equivalents and short- and long-term investments.
We maintain these balances principally in demand deposit accounts, United States
Treasury obligations and commercial paper with various
8
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
3. CASH, CASH EQUIVALENTS AND INVESTMENTS (CONTINUED)
INVESTMENTS IN DEBT SECURITIES (CONTINUED)
financial institutions. These financial institutions are located in different
areas of the United States, and our policy is designed to limit exposure to any
one institution. We perform periodic evaluations of the relative standing of
those financial institutions that participate in our investment strategy.
The following is a summary of cash, cash equivalents and both short- and
long-term investments by balance sheet classification for June 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------
<S> <C> <C>
Cash and cash equivalents:
Demand deposit accounts $ 1,138,147 $ 29,651,381
Commercial paper 18,527,339 11,829,908
---------------------- -----------------------
$ 19,665,486 $ 41,481,289
====================== =======================
Short-term investments:
Commercial paper $ 27,419,435 $ 13,090,581
U.S. Treasury obligations 3,071,557 8,565,306
---------------------- -----------------------
$ 30,490,992 $ 21,655,887
====================== =======================
Long-term investments:
Commercial paper $ -- $ 5,296,678
====================== =======================
</TABLE>
The estimated fair value of each investment approximates the amortized cost;
therefore, there are no unrealized gains or losses as of June 30, 2000 and
December 31, 1999.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ --------------
<S> <C> <C>
Electronic parts and other components $ 3,810,733 $ 3,616,080
Work in process 694,186 941,399
Finished goods 1,154,633 1,086,363
------------ --------------
5,659,552 5,643,842
Inventory reserves (3,944,128) (4,065,685)
------------ --------------
$ 1,715,424 $ 1,578,157
============ ==============
</TABLE>
9
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
5. EMPLOYMENT AGREEMENT
In connection with the hiring of our President and CEO, David E. Orr, on April
1, 1997 we entered into an employment agreement that required us to deposit $4.0
million into a rabbi trust. We were recognizing this amount as compensation
expense on a straight-line basis over the five-year employment agreement. Mr.
Orr received the interest earnings from the rabbi trust, and these earnings were
reported as compensation to him. The $4.0 million is payable to Mr. Orr on the
fifth anniversary of his employment or based upon certain triggering events as
described in the employment agreement.
In August 1999, Mr. Orr's employment agreement was amended, resulting in the
transfer of the $4.0 million from a rabbi trust to a secular trust. All other
terms of the employment agreement remained unchanged, including the term of Mr.
Orr's employment. Interest earnings from the secular trust are paid annually to
Mr. Orr. The accounting effects of transferring the $4.0 million from a rabbi
trust to a secular trust resulted in the removal of the restricted cash
classification on the balance sheet, along with the removal of the long-term
deferred compensation liability. The remaining amount of the $4.0 million that
was not charged to compensation expense at the time of this amendment has been
recorded as prepaid compensation. The balance of $1.4 million as of June 30,
2000 is included in other noncurrent assets and is being amortized to
compensation expense over the remaining term of the employment agreement.
Mr. Orr was also granted 80,000 shares of restricted common stock valued at $1.0
million. Upon issuance of this stock, we charged deferred compensation expense
equivalent to the market value at the date of grant, $1.0 million, to
stockholders' equity. We are amortizing this amount as compensation expense over
the term of the employment agreement of five years.
6. CONVERTIBLE DEBT
On May 17, 1996, we issued $115.0 million of 5% convertible subordinated notes
due May 15, 2001 that entitle the holder to convert the notes into shares of our
common stock. Interest is payable on May 15 and November 15 of each year. Each
$1,000 note is convertible into 24.1080 shares of our common stock at a
conversion price of $41.48 per share. We could not redeem the notes before May
15, 1999. After that date, we may redeem the notes initially at 102% and at
decreasing prices thereafter to 100% at maturity, plus accrued interest. Costs
associated with this financing have been deferred and are being amortized on a
straight-line basis over the term of the notes. As of May 15, 2000, the
convertible subordinated notes were reclassified from long-term liabilities to
short-term liabilities because the maturity date is within one year.
7. NET LOSS PER SHARE
All loss per share amounts for all periods have been presented to conform to
Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share." Due to the cumulative net losses for the periods presented, potential
common shares are considered antidilutive and therefore did not require
restatement of prior periods.
10
<PAGE>
PLIANT SYSTEMS, INC.
Notes to Condensed Financial Statements
8. BUSINESS SEGMENT INFORMATION
We are engaged in a single business segment consisting of the development,
manufacture, marketing and service of electronic equipment for the
telecommunications industry. Regional Bell operating companies (RBOCs),
independent telephone companies and competitive local exchange carriers are the
primary users of our products. In 1998, we entered into several agreements with
Lucent Technologies, which utilized our research and development and
manufacturing resources.
Revenues from Lucent, Marconi (formerly Bosch Telecom, Inc.) and direct sales to
RBOCs and others as a percentage of our total revenues are as follows:
June 30,
2000 1999
----------------------
Lucent 85.0% 94.0%
Marconi 12.0 2.0
RBOCs and others 3.0 4.0
----------------------
100.0% 100.0%
======================
Revenues by geographic area as a percentage of our total revenues are as
follows:
June 30,
2000 1999
----------------------
United States 89.0% 97.0%
Europe 11.0 3.0
----------------------
100.0% 100.0%
======================
The following customers' accounts receivable balances as a percentage of our
total accounts receivable as of June 30, 2000 and December 31, 1999 are as
follows:
2000 1999
-----------------------
Lucent 38.0% 92.0%
Marconi 19.0 3.0
RBOCs 16.0 3.0
Others 27.0 2.0
-----------------------
100.0% 100.0%
=======================
11
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
New Product Status
------------------
PRODUCT DEVELOPMENT
The Pliant(TM) 3000 Integrated Access Platform is our next generation access
product that we announced on December 15, 1999. We displayed Release 1.0 of our
Pliant 3000 at the ComNet trade show in late January and at Networld+Interop
2000 in May. The first release is our narrowband traditional telephony platform.
We have continued making progress in the development of the second release of
our Pliant 3000. The second release will add ATM-based digital subscriber line
capabilities to the traditional narrowband and data and voice services that are
available in the first release. We demonstrated the ADSL capability of the
integrated Pliant 3000 TDM/ATM platform at the SuperComm 2000 trade show in
Atlanta in early June. This was one of the industry's first live demonstrations
of a high-capacity integrated access system delivering ATM- and TDM-based
services over xDSL-enabled copper loops. The third release of our Pliant 3000
will implement a variety of converged networking and data service enhancements.
This release is planned for the third quarter of 2001.
PRODUCT CERTIFICATIONS AND RECOGNITION
The first release of our Pliant 3000 Integrated Access Platform received Network
Equipment Building Standards Level 3 certification in July. In addition, the
first release of our Pliant 3000 received UL 1950 listing and FCC Part 15
compliance. These assure our customers the highest levels of product safety when
deploying our platform into telecommunication networks. They also represent
important milestones in the continued development of our integrated access
platform.
On our first attempt, we successfully completed GR-303 interoperability testing
of our Pliant 3000 with Nortel Networks' DMS-100 family of Class 5 switches and
with Lucent Technologies' 5ESS(R) AnyMedia(TM) Class 5 switch. This ensures our
ILEC and CLEC customers of compatibility with the industry's leading PSTN
switching platforms. The Pliant 3000 is one of the first integrated access
platforms combining TDM and ATM functionality to pass Nortel's and Lucent's
extensive range of testing.
Pliant Systems was named the Innovations 2000 winner at the Wisconsin State
Telecommunications Association convention held in May. This award recognizes
products that provide new and innovative services to telecommunications
carriers. Companies that are introducing new products in 2000 are eligible for
the award.
12
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
New Product Status (continued)
------------------
FIELD TRIALS
At the end of the first quarter, we completed site engineering and began
shipping hardware in preparation for our first customer field trials for our
Pliant 3000. In early June, we completed the equipment installation phase of the
initial field trial at Twin Lakes Telephone Cooperative Corporation in
Gainsboro, Tennessee. The system has been operating since early July with
typical start-up conditions, and the system is meeting our expectations. We have
planned four additional field trials with three ILECs and one CLEC. We have
begun the installation phase of two of these trials and expect most of the
trials to be operational by the end of the third quarter. These trials will
provide a basis for expanded trials for the broadband functionality of our
second release.
REVENUE STATUS
We expect initial sales of the first release of our Pliant 3000 in September
2000. We expect to begin shipping the second release of our Pliant 3000 in the
fourth quarter of this year, if field trials are successful. We do not expect
substantial revenues from our Pliant 3000 product until after we successfully
complete development and customer field trials for the second and third releases
of the product. There can be no assurance that the final software integration
and/or field trials will be on schedule or successful or that we will have
orders for the new product.
Appointment of New Board Member
-------------------------------
In June, we appointed Norman R. Robertson to our Board of Directors. Mr.
Robertson has thirty years of financial management expertise, primarily in
high-growth technology companies. He is currently the Vice President of Finance
and Chief Financial Officer of Progress Software Corporation in Bedford,
Massachusetts, a leading supplier of Internet application development and
deployment software.
Marconi Relationship
--------------------
In early May 2000, Marconi (formerly Bosch Telecom) notified us that it will
discontinue development of its FSAN 2.0 product. Marconi also provided us a
notice of its intent to invoke its right to manufacture the FSAN 1.0 product at
its facilities and pay us royalties under the license agreement. We are
continuing discussions with Marconi to review the entire Alliance Agreement and
our future relationship with Marconi. There can be no assurance that we will
receive additional revenue from the Marconi Alliance.
13
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Second Quarter
--------------
Our net revenues in the second quarter of 2000 were $3.9 million, compared to
$7.9 million in the second quarter of 1999. Our revenues for the second quarter
of 1999 included $2.2 million of nonrefundable prepayments we received from
Lucent in prior years. If we exclude this one-time revenue, our second quarter
revenue decreased by $1.8 million compared to 1999. This decrease was due to
lower product sales and contract revenue, partially offset by higher services
revenue.
Our product sales and contract revenue decreased to $1.3 million from $3.9
million in 1999. In 2000, this revenue included $1.0 million in sales of our
legacy FLX products, compared to less than $1.0 million for the same period in
1999. The 1999 revenue included sales of a product we manufactured for Lucent.
It also included revenue from our Manufacturing Agreement with Lucent. In late
1999, we discontinued manufacturing the Lucent product due to decreased demand
from Lucent's customer. Also, in early 2000 we agreed with Lucent to transfer
the remaining manufacturing contract obligation to our 1998 Research &
Development Agreement with Lucent. As a result, our product sales have
decreased.
The revenue we earn from providing services increased to $2.6 million in the
second quarter of 2000, compared to $1.9 million for the same period in 1999.
This increase was due to recognition of milestones we met in providing
development services in connection with our 1998 Research & Development
Agreement with Lucent. We recognize services revenue under the
percentage-of-completion method of accounting.
Year to Date
------------
Our net revenues for the first six months of 2000 were $10.5 million, compared
to $12.1 million for the same period in 1999. Excluding the one-time revenues
explained above, our net revenues for the first six months of 2000 were $0.6
million higher than the same period in 1999. The increase in revenue was due to
higher services revenue, partially offset by lower product sales. Services
revenue increased to $7.6 million, compared to $3.8 million in 1999, due to the
amended Lucent agreements explained above and the achievement of significant
milestones in the research and development project for Lucent. Product sales and
services revenue decreased from $6.1 million in 1999 to $2.8 million in 2000 due
to the discontinuation of manufacturing of Lucent's product and the transfer of
contract revenues to our Research & Development Agreement with Lucent.
Product sales for the first six months of 2000 included $2.2 million in sales of
our FLX products, compared to $1.5 million in 1999. This increase is due to
end-of-life sales of the product. We no longer devote resources to actively
market our FLX products, and we do not expect significant future revenues from
our FLX products. In April 1999, we gave the required one-year notice to Lucent
that we would discontinue manufacturing of our FLX products. In early April
2000, Lucent placed a final order for these products under our long-term pricing
agreement. Based on our agreement with Lucent, Lucent must accept these products
for delivery by October 2000. Lucent may continue to order these products, but
we are no longer bound by the long-term pricing agreement. We do not expect
Lucent to place any
14
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
REVENUES (CONTINUED)
Year to Date (continued)
------------
additional orders for these products. We have received little revenue from our
1998 Alliance with Marconi, and we do not expect to receive significant future
revenues from the FSAN 1.0 products Marconi has developed.
Pliant 3000 Revenue Status
--------------------------
We expect that we will not have initial revenues from the first release of our
Pliant 3000 until September 2000. We anticipate that we will not receive
substantial revenues from our Pliant 3000 access product until after we
successfully complete development and customer field trials for the second and
third releases of that product. We plan to ship the second release of our Pliant
3000 in the fourth quarter of 2000 if the field trials, which may start in late
September, are successful. We expect to introduce the third release of our
Pliant 3000 access product during the third quarter of 2001. (See "Recent
Developments" above.)
COST OF SALES AND GROSS MARGIN
Our cost of sales for the second quarter of 2000 was $1.7 million, compared to
$3.7 million for the same period in 1999. Our cost of product revenue was $1.5
million in 2000 and $2.8 million in 1999. Our cost of services revenue was $0.2
million in 2000, compared with $0.9 million in 1999. The total gross margin of
$2.2 million for the second quarter of 2000 was 57%, compared to 36% for the
same period of 1999, excluding one-time revenues in 1999. The increased gross
margin for the second quarter reflects the increased services revenue from the
Lucent Research & Development Agreement.
Our cost of sales for the first six months of 2000 was $4.7 million, compared to
$5.6 million for the same period in 1999. Our cost of product revenue was $3.6
million in 2000 and $4.0 million in 1999. Our cost of services revenue was $1.1
million in 2000, compared with $1.6 million in 1999. The gross margin of $5.8
million was 55%, compared to 43% in 1999, excluding one-time revenues in 1999.
The increased gross margin reflects the increased services revenue from the
Lucent Research & Development Agreement.
Our industry is currently experiencing long lead times and shortages on certain
electronic parts. Although we have not experienced any critical problems at this
time, any significant delays with lead times on parts and/or component
availability could adversely affect our revenues, costs and gross margins.
If our Pliant 3000 sales goals and cost reduction targets are not met, our
potential profitability will be adversely affected. We expect that customer
price competition could have an adverse impact on our gross margins. We expect
that margins will fluctuate because we cannot accurately predict the timing of
shipments of our Pliant 3000 access product that is under development and in
field trials. We will also experience gross margin fluctuations because during
2000 a larger portion of our revenue will be derived from services for Lucent
rather than product.
15
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PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses for the second quarter of 2000 were
approximately $7.5 million, compared to $4.6 million for the same period in
1999. For the first six months of 2000, our research and development expenses
were approximately $13.7 million, compared to $9.0 million for the same period
in 1999. The increases of $2.9 million for the quarter and $4.7 million for the
six months were due primarily to higher third party services expenses, product
development expenses and personnel expenses associated with the development of
our Pliant 3000 product. The third party services expenses consisted of charges
from independent contractor and engineering development firms. Product
development expenses consisted of prototype costs and product software
development charges.
We anticipate that our research and development expenses in 2000 will exceed our
1999 expenses as we continue to develop our new product and support our field
trials. A tight labor market in the Research Triangle Park area of North
Carolina and extremely competitive engineering salaries for our development
staff are likely to increase our research and development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter of 2000 were
approximately $3.6 million, compared to $3.1 million for the same period in
1999. For the first six months of 2000, our selling, general and administrative
expenses were approximately $7.1 million, compared to $6.0 million for the same
period in 1999. Our 2000 expenses increased by $0.5 million for the second
quarter and $1.1 million for the six-month period because we hired additional
sales staff and incurred significant trade show expenses to launch our Pliant
3000 access product. These expenses included salaries, benefits and related
expenses for personnel engaged in direct marketing, sales and field service
support. They also included executive and administrative personnel, professional
fees and other general corporate expenses.
OTHER INCOME (EXPENSES)
In the second quarter of 2000, our interest expense was $0.8 million higher than
our interest income. In the second quarter of 1999, our interest expense was
also higher than our interest income by $0.8 million, in part because we
realized a $0.3 million capital loss related to the equity put option exercised
in March and April of 1999. We had less cash to invest in 2000, but yields on
our investments were higher than 1999 due to higher interest rates.
In the first six months of 2000, our interest expense was $1.4 million higher
than our interest income, compared to $1.1 million in 1999. Interest income is
earned on cash, cash equivalents and both short- and long-term investment
balances. Our interest income decreased by $0.3 million in the first six months
of 2000 compared to the same period in 1999 because we had less cash to invest.
The 2000 decrease would have been larger, but in 1999 we realized a $0.3 million
capital loss discussed above. This decrease was partially offset by higher
interest rates in 2000. Our interest expense in 2000 and 1999 was due to the
$115.0 million of 5% convertible notes that we issued in May 1996. Interest
expense will continue to exceed interest income in 2000 because we will use our
cash and investments to develop and market our Pliant 3000 access product.
16
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PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NET LOSS
During the second quarter of 2000, we lost $9.6 million or $(0.71) per share,
compared to our net loss of $6.5 million or $(0.48) per share (adjusted for the
one-time revenue) for the same period in 1999. For the first six months of 2000,
we lost $16.3 million or $(1.20) per share, compared to our net loss of $11.9
million or $(0.88) per share (adjusted for the one-time revenue) for the same
period in 1999. Our net losses increased in 2000 because we increased our
research and development expenses as well as our selling, general and
administrative expenses to support the development and introduction of our new
Pliant 3000 product. These increases were partially offset by an increase in our
gross margin due to increased services revenue.
Our operating results continue to reflect a lack of demand for our older
products and the transition to our new access product, the Pliant 3000, and its
related development and marketing expenses. We have been implementing our
business strategy announced in early 1998 for eight full quarters, and we expect
to incur substantial losses in future periods. (See Part II, Item 5: Risk
Factors.)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had $50.2 million of cash, cash equivalents and short-
and long-term investments, compared to $69.5 million at the end of 1999. These
amounts included our restricted cash as described below. Restricted cash is cash
that we cannot withdraw or use without restrictions and is not available to fund
our general operations.
Our cash and investment assets decreased by $19.3 million in the first six
months of 2000. Our net loss of $16.3 million represented most of the cash we
used. We also acquired $3.1 million of test equipment and software to support
development of our Pliant 3000 access product, which also contributed to the
decrease in our cash.
Our cash included restricted cash of $1.1 million at the end of 1999. This
balance consisted of $1.0 million for an outstanding stand-by letter of credit
and $50,000 for a corporate procurement card. The letter of credit expired in
March 2000. The collateral requirement for the bank procurement card was removed
in early April 2000. As of June 30, 2000, we had no restricted cash.
Accounts receivable decreased by $7.6 million during 2000. The 1999 balance of
$8.3 million included invoices for the Lucent product that we were manufacturing
and invoices related to the Lucent Manufacturing Agreement and Research &
Development Agreement. Deferred revenue also decreased due to our recognition of
revenue that was included in deferred revenue at the end of 1999. We have
increased our inventories slightly in order to support field trials and initial
customer orders for our Pliant 3000.
Based on our current projections of operations, we expect that cash, cash
equivalents and investments as of June 30, 2000, along with cash we will receive
from our development service contract with Lucent, will be adequate to fund our
operating requirements and property and equipment expenditures at least until
our convertible notes become due on May 15, 2001. Sales of our older products
and our new Pliant 3000 access product will not generate significant cash in
2000.
17
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PLIANT SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On May 17, 1996, we issued $115.0 million of 5% convertible subordinated notes
due on May 15, 2001. The holders may convert these notes into shares of our
common stock at a conversion rate of $41.48 per share. Interest is payable on
May 15 and November 15 of each year. Current liabilities increased by $104.7
million due to the reclassification of our $115.0 million notes from long-term
to short-term liabilities. Additional information about our convertible
subordinated notes is described in Note 6 (Convertible Debt) to our Condensed
Financial Statements. We are current on all interest payments, and we anticipate
making interest payments in the future.
In late 1998, we began negotiating with a committee of note holders to
restructure our $115.0 million of convertible subordinated notes. CIBC
Oppenheimer Corp., our financial advisor at that time, assisted us in these
negotiations. We were seeking to extend the maturity date of a significant
portion of the notes until after we began substantial shipments of our Pliant
3000 access product. In November 1999, we decided not to undertake a
debt-restructuring transaction at that time. Implementing a debt-restructuring
plan would have resulted in the reduction of our cash resources, dilution of our
equity, an increase in our interest payments, and/or other adverse consequences.
We may have to consider such a transaction after we begin selling our new Pliant
3000 access product and as we attempt to raise additional equity and/or debt
financing, because the existing debt terms may impede our ability to raise
capital.
We expect that additional equity and/or debt financing will be required to repay
the $115.0 million of notes when they become due on May 15, 2001. Failure to pay
principal and interest when due would have a material adverse effect on our
company. If our business strategy fails to generate investor confidence in our
ability to earn future revenue and minimize our losses, we will be unable to
obtain the additional financing needed to repay the notes when due. Also, we may
be unable to obtain such financing on favorable terms.
OTHER FINANCIAL INFORMATION
Backlog
-------
Our backlog includes sales orders we have received that have a scheduled
delivery date before June 30, 2001. The aggregate value of orders received and
included in backlog was approximately $2.0 million on June 30, 2000. We believe
that the orders included in the backlog are firm orders and will be shipped
before June 30, 2001. We may allow our customers to cancel or delay orders where
it is in our best interest to do so.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The following table provides information about our financial instruments,
primarily investments, which are sensitive to changes in interest rates. For
investment securities and debt obligations, the table presents principal cash
flows and related interest rates by expected maturity dates. Our investments are
18
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PLIANT SYSTEMS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
QUANTITATIVE DISCLOSURES (CONTINUED)
classified as short-term investments. All short-term investments are scheduled
to mature within twelve months after June 30, 2000. As of June 30, 2000, we had
no long-term investments.
EXPECTED MATURITY DATES
-----------------------
<TABLE>
<CAPTION>
Fair Value
(dollars in 000's) 2000 2001 2002 2003 2004 Total 6/30/00
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments $ 30,491 -- -- -- -- $ 30,491 $ 30,491
Long-term investments -- -- -- -- -- -- --
Average interest rate 6.0%
Liabilities:
Short-term debt -- 115,000 -- -- -- 115,000 $ 57,500
Average interest rate 5.0% 5.0%
</TABLE>
QUALITATIVE DISCLOSURES
Our investments are held for non-trading purposes and are subject to market risk
for interest rates. We maintain our short- and long-term investments principally
in United States Treasury obligations and commercial paper with various
financial institutions. These institutions are located in different areas of the
United States, and our policy is designed to limit exposure to any one
institution, as well as credit and maturity risks. We perform periodic
evaluations of the relative standing of those financial institutions that
participate in our investment strategy. While we cannot predict or manage future
interest rates, we evaluate our investment positions on an ongoing basis.
The short-term debt, which accrues interest at a fixed rate of 5%, is subject to
market risk for interest rates. The 5% fixed rate may no longer approximate
current market prices for such instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PROPOSAL 1: ELECTION OF DIRECTORS
Our annual meeting of stockholders was held on Tuesday, May 16, 2000. At this
meeting, our stockholders voted on three proposals. These proposals are
described below, along with the voting results.
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PLIANT SYSTEMS, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
PROPOSAL 1: ELECTION OF DIRECTORS (CONTINUED)
Our stockholders voted in favor of our nominees for two Class I directors to
serve three-year terms that will expire at the 2003 annual meeting of
stockholders. There was no solicitation in opposition to our nominees. The
voting results are as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstaining
<S> <C> <C> <C>
Dr. John R. Hutchins III 12,207,745 0 72,939
David E. Orr 12,211,585 0 69,099
</TABLE>
PROPOSAL 2: AMENDMENT TO OUR EQUITY COMPENSATION PLAN
Our stockholders approved an amendment to our Equity Compensation Plan
increasing the number of shares of our common stock reserved for issuance under
the plan by 650,000 shares. The voting results are as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstaining
<S> <C> <C> <C>
Votes to amend Equity
Compensation Plan 11,785,016 468,158 27,510
</TABLE>
PROPOSAL 3: RATIFY OUR SELECTION OF INDEPENDENT AUDITORS
Our stockholders ratified our selection of Ernst & Young LLP to serve as our
auditors for the year ending December 31, 2000. The voting results are as
follows:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstaining
<S> <C> <C> <C>
Votes to ratify independent
auditors 12,229,309 33,523 17,852
</TABLE>
ITEM 5. OTHER INFORMATION
RISK FACTORS
In connection with the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document are advised that this
document contains both statements of historical facts and forward-looking
statements. Our forward-looking statements include statements related to our
customers, business partners and competitors, our previous product, our new
product introduction, and our future financial requirements. Our forward-looking
statements also relate to our field trials,
20
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
discontinued debt-restructuring activities, and relationships with Lucent and
Marconi. Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions are intended to identify
forward-looking statements. Our forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated by the forward-looking statements.
Our forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by management. These statements are not guarantees of future performance,
and actual actions or results may differ materially. These statements are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. We undertake no obligation to update publicly any forward-looking
statements as a result of new information, future events or otherwise, unless
required by law.
You should carefully consider the risks described below, together with all of
the other information included in this Form 10-Q, before making an investment
decision. The risks and uncertainties described below are not the only ones we
face. If any of the following risks actually occur, it is likely that our
business, financial condition or operating results would be harmed. In such
case, the trading price of our common stock could decline, and you could lose
all or part of your investment.
Financial Risks
---------------
WE HAVE INCURRED NET LOSSES EVERY YEAR AND WE MAY NEVER ACHIEVE PROFITABILITY.
Our net loss for the first six months of 2000 was $16.3 million. We have never
been profitable on an annual basis and may never achieve profitability. As of
June 30, 2000, we had an accumulated deficit of approximately $218.6 million.
WE HAVE NO ESTABLISHED PRODUCT THAT GENERATES SIGNIFICANT REVENUE.
We expect sales volume for our previous product, the FLX-2500, to remain low.
The pricing terms of our contract with Lucent for our FLX-2500 product expired
on April 8, 2000. Before the expiration date, Lucent placed what we believe will
be its final order for the FLX-2500. Except for the Research & Development
contracts, we anticipate low revenues until our Pliant 3000 access product
starts to generate sales in September 2000. We must continue to invest
substantial resources to develop and market our Pliant 3000 access product. We
do not expect significant revenues from our new product until 2001.
PRICE COMPETITION MAY PREVENT US FROM ACHIEVING PROFITABILITY.
We expect price competition to continue to be an important competitive factor.
Our previous contracts with Lucent for our FLX-2500 were forward priced,
requiring us to deliver these products at prices that would be profitable only
at high volumes. We believe it is unlikely that high volume demand will ever
develop for these products. Potential customers for our Pliant 3000 product may
also require long-term contracts at fixed prices. If these volumes do not
materialize and if we are unable to achieve planned cost reductions, our new
product may not be profitable.
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
---------------
ON MAY 15, 2001, OUR CONVERTIBLE BONDS IN THE AMOUNT OF $115.0 MILLION BECOME
DUE, AND WE WILL NOT HAVE THE RESOURCES TO PAY THEM, UNLESS WE ARE ABLE TO RAISE
ADDITIONAL EQUITY OR DEBT FINANCING.
On May 17, 1996, we issued $115.0 million of 5% convertible subordinated notes
due May 15, 2001. Interest is payable on May 15 and November 15 of each year.
The holders may convert these notes into shares of our common stock at a
conversion rate of $41.48 per share. Since our current stock price is
significantly lower than $41.48, we expect that we will need additional equity
and/or debt financing to repay the notes when they become due. If our new Pliant
3000 product fails to generate investor confidence in our ability to earn future
revenue and minimize our losses, we will be unable to obtain the additional
financing needed to repay the notes when due. Also, we may be unable to obtain
such financing on favorable terms. Failure to pay principal and interest when
due would have a material adverse effect on our company.
RESTRUCTURING OUR DEBT MAY CAUSE OUR EQUITY OWNERS TO SUFFER SUBSTANTIAL
DILUTION.
In late 1998, we began negotiating with a committee of note holders to
restructure our $115.0 million of convertible subordinated notes. CIBC
Oppenheimer Corp., our financial advisor at that time, assisted us in these
negotiations. We were seeking to extend the maturity date of a significant
portion of the notes until after we begin substantial shipments of our Pliant
3000 access product. In November 1999, we decided not to undertake a
debt-restructuring transaction at that time. Implementing a debt-restructuring
plan would have resulted in the reduction of our cash resources, dilution of our
equity, an increase in our interest payments, and/or other adverse consequences.
We may have to consider such a transaction as part of an overall refinancing
plan after we begin selling our new Pliant 3000 access product and as we attempt
to raise additional equity and/or debt financing. Undertaking a debt
restructuring as part of an equity and/or debt financing plan may result in
dilution of our equity.
WE WILL REQUIRE ADDITIONAL FINANCING TO FUND OUR OPERATIONS.
We estimate that we will have adequate cash resources to operate our business
and develop our product at least until our convertible notes become due on May
15, 2001. Besides the financing needed to repay the notes, we will also require
additional financing to fund our operations, primarily our product development
activities. The terms of our existing debt may impede our ability to raise
capital. We cannot be certain that we will be able to obtain additional
financing or that the financing will be on favorable terms. If we are unable to
obtain sufficient financing, we will be unable to continue upgrading our product
to meet customer requirements and compete effectively.
OUR PLIANT 3000 ACCESS PRODUCT IS OUR ONLY NEW PRODUCT UNDER DEVELOPMENT, AND IF
WE EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCT, IN COMPLETING SUCCESSFUL FIELD
TRIALS OR IN OBTAINING CUSTOMER ORDERS, WE MAY BE UNABLE TO OBTAIN FINANCING TO
REPAY OUR CONVERTIBLE NOTES.
To survive, we cannot have significant delays in the development of our Pliant
3000 access product or significant problems in our field trials. To obtain the
financing that we will need to repay our convertible
22
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
---------------
OUR PLIANT 3000 ACCESS PRODUCT IS OUR ONLY NEW PRODUCT UNDER DEVELOPMENT, AND IF
WE EXPERIENCE DELAYS IN DEVELOPING OUR PRODUCT, IN COMPLETING SUCCESSFUL FIELD
TRIALS OR IN OBTAINING CUSTOMER ORDERS, WE MAY BE UNABLE TO OBTAIN FINANCING TO
REPAY OUR CONVERTIBLE NOTES. (CONTINUED)
notes, we expect investors will want to confirm that the second release of our
Pliant 3000 product performs as anticipated and generates revenue. We do not
expect significant revenue from sales of our Pliant 3000 product until after the
second release is completed and marketed. The second release is not scheduled
for shipment until the fourth quarter of 2000. Any delays in developing the
second release, completing successful field trials of the second release, or
receiving orders for the second release are likely to adversely affect our
ability to raise capital before our convertible notes become due on May 15,
2001.
IF WE ARE INITIALLY SUCCESSFUL IN DEVELOPING AND MARKETING OUR PLIANT 3000
PRODUCT, WE MAY NOT BE ABLE TO GENERATE SUSTAINED REVENUE.
Our Pliant 3000 product must compete in the market on price, architecture,
features and other factors. Our development of our Pliant 3000 access product
will be subject to significant technical and customer acceptance challenges. The
development will require us to invest substantial money and time. We cannot be
certain that we will be able to complete the development of this access product
or that our product will be attractive to customers and priced competitively
with the products of our competitors. If our Pliant 3000 product does not
compete effectively, we will be unable to generate sustained revenue. As our
Pliant 3000 product is the only product we have that we believe will generate
substantial revenue in the foreseeable future, our company will be materially
and adversely affected if it is not a competitive product.
Even with successful development results, competitors already are selling
products to customers in the market we targeted, and competitors may develop new
competing technology and products that are more attractive to customers than our
Pliant 3000 product. Many of our competitors are larger and financially
stronger. They may be able to offer products at lower prices.
VARIATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE VOLATILITY IN OUR STOCK
PRICE.
Since 1997, sales of our older products have decreased each year, and we expect
the decline to continue. We are developing our Pliant 3000 access product, but
shipments of this product will not generate significant revenue until at least
2001. Our new product sales are difficult for us to project and may fluctuate
from quarter to quarter. Also, the timing of our operating expenses may vary
between quarters. These factors may cause volatility in our stock price.
OUR STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET TO THE OVER THE
COUNTER BULLETIN BOARD, AND THIS MAY CAUSE VOLATILITY IN OR ADVERSELY AFFECT OUR
STOCK PRICE.
On February 12, 1999, the Nasdaq National Market delisted our shares of common
stock because we failed to achieve compliance with continued listing criteria.
Our shares are now traded on the Over The
23
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Financial Risks (continued)
---------------
OUR STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET TO THE OVER THE
COUNTER BULLETIN BOARD, AND THIS MAY CAUSE VOLATILITY IN OR ADVERSELY AFFECT OUR
STOCK PRICE. (CONTINUED)
Counter Bulletin Board (OTCBB). The OTCBB is a regulated quotation service that
displays real-time quotes and volume information in over-the-counter equity
securities. The OTCBB does not impose listing standards or requirements other
than requiring regular filings with the SEC. It also does not provide automatic
trade executions and does not maintain relationships with quoted issuers. Stocks
traded on the OTCBB may face a loss of market makers and a lack of readily
available bid and ask prices. These stocks may also experience a greater spread
between the bid and ask price and a general loss of liquidity. Certain investors
have policies against purchasing or holding OTCBB securities. The delisting and
subsequent trading on the OTCBB have had, and will continue to have, a material
adverse effect on both trading volume and market value of our stock. Since
delisting, our stock price has traded from a low of $1.06 to a high of $16.06
per share, and the closing price of our stock on August 7, 2000 was $5.00.
We have not committed to a time period to apply for Nasdaq National Market
relisting. We may apply for relisting with the commencement of new product
revenue, with an attempt to raise additional capital, and/or upon advice from
our investment bankers. There is no assurance that we will be relisted on the
Nasdaq National Market or maintain that listing status.
Customer Risks
--------------
MOST OF OUR PROJECTED REVENUE FOR 2000 IS FROM OUR CONTRACTS WITH LUCENT, AND
OUR FAILURE OR LUCENT'S FAILURE TO COMPLY WITH THE TERMS OF THE CONTRACT COULD
HAVE A NEGATIVE EFFECT ON OUR FINANCIAL RESULTS.
We expect that Lucent will provide more than 80% of our projected 2000 revenue.
We will remain substantially dependent upon revenue from Lucent until we
complete development and successfully market our Pliant 3000 product. Our
agreements with Lucent provide that Lucent will pay us significant fees for our
development services. If Lucent fails to make the payments as scheduled, our
cash flow would be adversely affected. We have given Lucent a one-year notice of
our intention to discontinue manufacturing the FLX-2500 product. This notice
took effect on April 8, 2000. By October 2000, Lucent must take delivery of all
products ordered. Our failure or Lucent's failure to comply with existing
agreements would have a material adverse effect on us.
24
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
--------------
MOST OF OUR PROJECTED REVENUE FOR 2000 IS FROM OUR CONTRACTS WITH LUCENT, AND
OUR FAILURE OR LUCENT'S FAILURE TO COMPLY WITH THE TERMS OF THE CONTRACT COULD
HAVE A NEGATIVE EFFECT ON OUR FINANCIAL RESULTS. (CONTINUED)
Our relationship with Lucent also may adversely affect our ability to partner
with others in the telecommunications industry, due to change of control
provisions contained in our agreements with Lucent. If Lucent decides to change
its relationship with us, or if there are rumors that Lucent will change its
relationship with us, there could be an adverse effect on the market price of
our stock.
In addition, Lucent is a vendor of digital loop carrier and integrated access
products, and our Pliant 3000 product may compete with Lucent in some
circumstances. Such competition could adversely affect Lucent's cooperation with
us to the extent required under our agreements with Lucent.
CUSTOMERS IN OUR CLEC TARGET MARKET FOR OUR PLIANT 3000 HAVE INTENSIVE CAPITAL
REQUIREMENTS AND MAY NOT PURCHASE OUR PRODUCTS UNLESS WE OFFER VENDOR FINANCING.
The CLEC market is growing very rapidly and requires extensive capital
investments. Many of our target customers in that market may require financing.
Such financing may be in the form of extended credit terms and/or equipment
leasing. Many CLECs already have substantial debt. Credit risks of these
customers may prevent us from borrowing to provide them with vendor financing.
Other vendors with whom we will be competing regularly provide vendor financing
and have the financial resources to provide financing to customers with high
credit risk. If we are unable to provide financing, these customers may not
purchase our Pliant 3000 product. If we are able to provide vendor financing but
are unable to collect from our customers, our financial condition will be
adversely affected.
OUR RELATIONSHIP WITH MARCONI MAY NOT GENERATE SIGNIFICANT REVENUES.
We have received little revenue from the Marconi Alliance Agreement since 1998.
Total revenue from Marconi for the six months ending June 30, 2000 was $1.3
million. Due to Marconi's notification to us that it will discontinue
development of its FSAN 2.0 product and of its intent to manufacture the FSAN
1.0 product at its facilities, we are uncertain whether we will obtain
significant additional revenues from the iFLX and/or FSAN products. We are
focusing our business on sales of our Pliant 3000 access product, and our
business plan does not include iFLX or FSAN revenues after 2000. Marconi has
decided to discontinue development of FSAN 2.0; therefore, we will not achieve
all the benefits intended by this Agreement.
OUR PRODUCT WILL HAVE TO COMPETE WITH THOSE OF LARGER AND MORE FINANCIALLY
STABLE COMPANIES IN OUR TARGET MARKET.
Even if our development results are successful, our competitors already are
selling products to customers in the market we have targeted. Most of these
competitors are larger than we are, and many are
25
<PAGE>
PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
--------------
OUR PRODUCT WILL HAVE TO COMPETE WITH THOSE OF LARGER AND MORE FINANCIALLY
STABLE COMPANIES IN OUR TARGET MARKET. (CONTINUED)
profitable. Our competitors may develop new, competing technologies and products
that are more attractive to customers than are our technologies and products.
Also, our competitors may offer their products at materially lower prices or on
more favorable financing terms.
NEW PRODUCT ANNOUNCEMENTS MAY DELAY OR PREVENT SALES OF OUR PRODUCTS.
As we announce new products to better meet the changing requirements of
customers, our customers may delay orders of existing products until the new
products are available for shipment or until small volumes of new products are
adequately field tested. Announcements by Lucent of its new digital loop carrier
product, AnyMedia, had this adverse effect on sales of our FLX-2500 product, and
the same could occur in the future with respect to our Pliant 3000 product we
are developing.
IF COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOLUTIONS TO OUR PLIANT 3000
PRODUCT ACHIEVE SIGNIFICANT ACCEPTANCE, THE DEMAND FOR OUR PRODUCT MAY NOT
DEVELOP.
Technologies that compete with our Pliant 3000 access product may include other
telecommunications-related wireline technologies, cable-based technologies,
fixed wireless technologies and satellite technologies. If our potential
customers choose these alternative technologies, our business, financial
condition and results of operations could be harmed. Cable operators are
currently deploying products that will be capable of delivering voice,
high-speed data and video services over cable. Our technology may not be able to
compete effectively against these technologies on price, performance or
reliability.
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE.
Our position in existing markets or potential markets could be eroded rapidly by
product advances. The life cycles of our products are difficult to estimate. Our
growth and future financial performance will depend in part upon our ability to
enhance existing products and to develop and introduce new products that keep
pace with:
o the increased use of the Internet;
o the growth in remote access by telecommuters;
o the increasingly diverse distribution sources for high-quality
digital video; and
o other industry and technological trends.
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Customer Risks (continued)
--------------
IF WE DO NOT RESPOND QUICKLY TO CHANGING CUSTOMER NEEDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS BY OUR COMPETITORS, OUR PRODUCTS MAY BECOME OBSOLETE. (CONTINUED)
We expect that our product development efforts will continue to require
substantial investments. We may not have sufficient resources to make the
necessary investments. If we fail to timely and cost effectively develop new
products that respond to new technologies and customer needs, the demand for our
products may fall, and we could lose revenues.
Other Risks
-----------
OUR LIMITED BARGAINING POWER WITH CUSTOMERS AND VENDORS MAY NEGATIVELY IMPACT
OUR NEW PRODUCT SALES AND GROSS MARGINS.
As fewer large, potential customers dominate our market, we may not have
sufficient bargaining power to sell our products on favorable terms. If we
succeed in expanding our sales, growth will place significant strain on our
operational resources and systems. Because we depend on single source suppliers
for certain materials, we may experience supplier delays. If this issue causes
delays in filling customer orders, our customers may be dissatisfied.
Our industry is currently experiencing long lead times and shortages on certain
electronic parts. Although we have not yet experienced any critical problems,
any significant delays with lead times on parts and/or component availability
could adversely affect our revenues, costs and gross margins.
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY NEGATIVELY IMPACT OUR
FUTURE REVENUES.
Our patents and other proprietary rights may not prevent our competitors from
developing non-infringing technology and products that are more attractive to
customers than our technology and products. Our technology and products could be
determined to infringe on the patents or other proprietary rights of others. If
this were to occur, we may not be able to generate future revenues.
OUR ABILITY TO ATTRACT AND RETAIN KEY DEVELOPMENT AND SALES PERSONNEL COULD
NEGATIVELY IMPACT OUR CURRENT AND FUTURE PRODUCT DEVELOPMENT AND SALES.
We began developing our Pliant 3000 product in 1998, and many challenges exist
to complete its development and successfully sell the product. We will need to
retain our current key engineers, as well as attract additional engineers who
have hardware and software experience in advanced digital access technologies.
We are managing multiple, concurrent projects that will require critical program
management expertise to efficiently allocate scarce engineering resources among
competing projects. We will also have to continue to attract and retain
experienced telecommunications equipment sales personnel. There can be no
assurance we will be successful in such efforts.
The value of our stock options for management and employees may be reduced at
times due to delisting to the OTCBB. This decline in our stock value would be
caused by lower stock prices, lower trading
27
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other Risks (continued)
-----------
OUR ABILITY TO ATTRACT AND RETAIN KEY DEVELOPMENT AND SALES PERSONNEL COULD
NEGATIVELY IMPACT OUR CURRENT AND FUTURE PRODUCT DEVELOPMENT AND SALES.
(CONTINUED)
volume and other financial reasons. This could have a material adverse effect on
our ability to recruit and retain key personnel unless we provide other
recruiting and retention incentives, which will be expensive. If we fail to
recruit and retain key employees, this would have a material adverse effect on
our ability to implement our business plan, including our ability to develop and
sell our Pliant 3000 access product.
A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
We have made forward-looking statements in this document, all of which are
subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed future business success and
financial results. Such forward-looking statements include, but are not limited
to, statements as to our expectations regarding:
o the future development and sales opportunities for our Pliant 3000
product;
o the future adoption of our planned products and services;
o future revenue opportunities;
o the establishment and future growth of our customer base;
o our ability to successfully develop and introduce our Pliant 3000
product;
o future expense levels (including cost of revenues, research and
development, sales and marketing, and general and administrative
expenses);
o future sales and marketing efforts;
o future capital needs;
o our ability to raise capital to repay our $115.0 million of
convertible notes due May 15, 2001;
o the future effectiveness of our intellectual property rights; and
o the effect of any litigation in which we would become involved.
When we use words such as "believe," "expect," "anticipate" or similar words, we
are making forward-looking statements.
You should note that an investment in our common stock involves certain risks
and uncertainties that could affect our future business success or financial
results. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth in this "Risk Factors" section and elsewhere in this Form 10-Q.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described in
this "Risk Factors" section and elsewhere in this Form 10-Q could materially and
adversely affect our business, financial condition and operating results.
28
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PLIANT SYSTEMS, INC.
ITEM 5. OTHER INFORMATION (CONTINUED)
RISK FACTORS (CONTINUED)
Other Risks (continued)
-----------
A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. (CONTINUED)
We undertake no obligation to update publicly any forward-looking statements as
a result of new information, future events or otherwise, unless required by law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
August 14, 2000 /s/ John T. Autrey
------------------------------------------
John T. Autrey
Vice President and Chief Financial Officer
29
